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Are Democracy and Capitalism Incompatible?

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Are Democracy and Capitalism Incompatible? Student Economic Review, Vol. 17, 2003, pp. 41-48 ARE DEMOCRACY AND CAPITALISM INCOMPATIBLE? BY SARAH LEWIS Senior Sophister Democracy and capitalism are commonly perceived as part of modernisation. Lumped together in the political discourse, Sarah Lewis critically examines whether they form the “natural order of things”. She concludes that the philosophical tenets of democracy and capital accumulation diverge sharply. She illustrates how crisis is averted through checking mechanisms and ideological indoctrination that combine to make the notion of citizenship a chimera. Democracy and capitalism are key words in contemporary political discourse. Democracy is founded on the ideals of liberty, equality and popular sovereignty, whereby individuals have the freedom to act without social impediment and power is both equal and accountable to those affected by its exercise. It cannot be said of democracy, as Lord Acton said of liberty, that it “is not a means to a higher political end. It is itself the highest political end” Hayek (1944). Democracy is essentially a means, a utilitarian device for safeguarding internal peace and individual freedom, with a commitment to the progressive extension of people’s capacity to govern their personal lives and social histories (Bowles and Gintis, 1986). One of the most familiar perceptions of capitalism is as an economic system in which the economy is described in terms of markets. The government leaves the economy alone and free market forces operate along the lines of the laissez-faire model as expounded by Adam Smith (Bealey, 1993). ‘Capitalism’ is essentially derived from ‘capital’, an accretion of wealth (Bealey, 1993: 205). It is acknowledged by most scholars that capitalism and democracy do not operate in separate spheres, the former relating solely to economics and the latter to politics. Historically, a correlation can be seen between economic growth and democratic values1, and both terms are regularly encapsulated in the concept of liberalism. Both democracy and capitalism stress the realisation of individual capacities, individual preferences and individual participation. If the institutional framework in which both operate can be shown to be responsive to individual preferences in an egalitarian manner, then it can be said that the two concepts are 1 Put forward by scholars such as Lipset (1978). 41 42 ARE DEMOCRACY AND CAPITALISM INCOMPATABLE? compatible. Analysis based on the works of Dahl, Green, Macpherson and others however shows that this is not the case. Due to the ‘rule of privilege’, that for Green (1986), is the essence of capitalism, the political sphere does not escape the effects of the inequalities created by capitalism. The adverse consequences for political equality lead us to conclude that democracy and capitalism are essentially incompatible. Dahl (1998: 166) likens market capitalism and democracy to ‘two persons bound in a tempestuous marriage that is riven by conflict and yet endures because neither partner wishes to separate from the other.’ Historically, modern democracy rose alongside capitalism and, according to Schumpeter, in causal connection with it’ 2 suggesting that modern democracy is the product of the capitalist system. Looking to history, Dahl (1998) points to the fact that democracy3 has only ever endured in countries with a predominantly market economy and has never endured in a country with a predominantly non-market economy. This, according to Dahl, is because certain features of market capitalism are favourable with democratic institutions. The private ownership of economic entities allows them to be guided solely by self-interested incentives. Hayek (1944: 73) goes so far to say that democracy is only possible within a capitalist system, if capitalism is taken to mean a competitive system based on free disposal over private property and economic entities. Decisions are made without central direction but the ‘invisible hand’ of the market serves to co-ordinate and control. As a result goods and services are produced ‘much more efficiently than any known alternative’ (Dahl, 1998: 167) and long run capitalism has typically led to economic growth.4 By cutting acute poverty and improving living standards, economic growth helps reduce social and political tension. Growth also provides resources that are available should conflicts arise as 2 Quoted by Bealey (1993) in ‘Capitalism and Democracy’, European Journal of Political Research, 23,. 3 This Dahl does limit to polyarchal democracy, though acknowledges that ‘it also applies pretty well to the popular governments that developed in the city-states of Greece, Rome and medieval Italy and to the evolution of representative institutions and the growth of citizen participation in northern Europe’ (Dahl, 1998: 166) 4 It is not true to state forthright that economic growth is unique to democratic countries, and as Dahl himself points out: ‘There appears to be no correlation between economic growth and a country’s type of government or regime’ (Dahl, 1998:170). Bealey (1993: 221) states non-democratic capitalism is as common as democratic capitalism and points to Taiwan and South Korea as examples of non-democratic countries with high growth rates. Huntington (1991) however contains that economic growth is unfavourable to non-democratic regimes, often undermining their legitimacy in the long run. SARAH LEWIS 43 well as to provide individuals, groups and governments with resources for education which helps foster a literate and educated citizenry. Market capitalism is also favourable for democracy because of its social and political consequences. A large middle stratum of property owners are created, that Dahl sees as typically seeking education, autonomy, personal freedom, property rights, the rule of law, and participation in government. The middle classes are the ‘natural allies’ of democratic ideas and institutions, as Aristotle first said. On this topic Bealey quotes Schumpeter, who argues that the rationalist scheme on which classical democracy rests is essentially bourgeois in origin. Milton Friedman (1962) points out the social benefits of the anonymity of exchange and the irrelevance of identities prevalent in the capitalist system. No one who buys bread knows whether the wheat from which it is made was grown by a Communist or a Republican, by a Constitutionalist or a Fascist, or for that matter, by a black or white person. This Friedman calls the staple of the liberal identification of capitalism and freedom. The decentralised nature in which economic decisions are made in a capitalist economy is for Dahl the most important feature of the capitalist system that makes it compatible with democracy. This is because it avoids the need for a powerful central government. For a government to allocate scarce resources, a detailed and comprehensive central plan is needed, requiring a staggering amount of reliable information. Looking again to history, no government has proved up to the task. Dahl heeds that it is not the inefficiencies of a centrally planned economy that are most injurious to democratic prospects, but the social and political consequences of putting the resources of an entire economy at the disposal of government leaders, recalling the aphorism ‘power corrupts and absolute power corrupts absolutely’ (Dahl, 1998: 169). Viewed as totally abstract, self enclosed decision-making processes, market capitalism and democracy have several common systemic features. In both individualism is at a premium, with the individual actor making a rational choice, thus there is an analogy between consumer sovereignty and voter sovereignty. In both cases the invisible hand is at work, with conflict between buyers and sellers being resolved by demand and supply and with the equilibrium price benefiting the greatest number. Here the analogy breaks down because the parallel with a democratic polity could only be sustained if voters did not have to accept policies they had not voted for in the same way that purchasers can exercise an effective veto by refusing to buy a particular product (Bealey, 1993). Manipulation however still exists in a ‘responsible and responsive way’ as in the democratic state political leaders control each other by exchanging favours, threatening and promising, organising alliances, opposing and supporting each other’s policies. These moves are only understandable against the background of the competition for votes (Lindblom, 1988: 28). 44 ARE DEMOCRACY AND CAPITALISM INCOMPATABLE? Whilst democratic capitalism suggests a set of harmonious and mutually supportive institutions, Bowles & Gintis (1986) argue that even proponents of capitalism as good for democracy realise this is not the case. Approaching market capitalism from a democratic point of view reveals it has ‘two faces’: one pointing towards democracy, the other pointing in the opposite direction (Dahl, 1998). Dahl argues that democracy and market capitalism are locked in a persistent battle in which each modifies and limits the other. The market brings gains for some, but also harm to others. Economic actors motivated by self-interest have little incentive for taking the good of others into account; and on the contrary have powerful incentives for ignoring the good of others if by doing so they themselves stand to gain (Dahl, 1998: 174). When harm results from decisions determined by unregulated competition and markets, questions about democracy are bound to arise causing some who believe in the virtues of total equality to
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